[Dynamic Orthopedics P. Ltd. v. CIT, (2010) 321 ITR
300 (SC)]
The appellant-assessee, a private limited company, was
engaged in the manufacture and sale of orthopedic appliances. In the return of
income filed, the assessee returned an income of Rs.1,50,730. In the profit and
loss account, depreciation was provided at the rates specified in Rule 5 of the
Income-tax Rules, 1962 (‘Rules’, for short). While completing the assessment of
income, the Assessing Officer recomputed the book profit for the purpose of S.
115J of the Income-tax Act, 1961, (‘Act’, for short), after allowing
depreciation as per the Schedule XIV to the Companies Act. The rates of
depreciation specified in Schedule XIV to the Companies Act, 1956 (‘1956 Act’,
for short) were lower than the rates specified under Rule 5 of the Rules.
Being aggrieved by the assessment order, the assessee took up
the matter before the Commissioner of Income-tax (Appeals) [‘CIT(A)’ for short],
who came to the conclusion that the assessee was a private limited company. It
was not a subsidiary of public company. Therefore, placing reliance on S. 355 of
the 1956 Act, the Commissioner of Income-tax (Appeals) held that S. 350 of the
1956 Act was not applicable to the assessee and, in the circumstances, the
Income-tax Officer had erred in providing depreciation at the rates specified
under Section Schedule XIV to the 1956 Act. Consequently, the Commissioner of
Income-tax (Appeals) held that the assessee was right in providing depreciation
in its accounts as per Rule 5 of the Rules.
Aggrieved by the decision of the Commissioner of Income-tax
(Appeals), appeal was preferred by the Department to the Income-tax Appellate
Tribunal (‘Tribunal’, for short). By judgment and order dated January 13, 1999,
the Tribunal held that since the assessee was a private limited company, S. 349
and S. 350 were not applicable to the facts of the case and, in the
circumstances, the Income-tax Officer had erred in directing the assessee, which
was private limited company, to provide for depreciation as per Schedule XIV to
the 1956 Act, which was not applicable to private limited companies (see S. 355
of the 1956 Act). Consequently, the appeal filed by the Department before the
Tribunal stood dismissed.
Aggrieved by the said decision of the Tribunal, the
Department preferred appeal before the High Court of Kerala which held that S.
115J of the Act was introduced in the A.Y. 1988-89. S. 115J of the Act read with
Explanation (iv), as it stood at the material time, was a piece of legislation
by incorporation and, consequently, the provisions of S. 205 of the 1956 Act
stood incorporated into S. 115J of the Act, hence, the Income-tax Officer was
right in directing the assessee to provide for depreciation at the rate
specified in Schedule XIV to the 1956 Act and not in terms of Rule 5 of the
Rules.
On a civil appeal being filed by the assessee, the Supreme
Court observed that the view of the High Court, in the present case, was similar
to view taken by it in the case of CIT v. Malayala Manorama Co. Ltd. reported in
(2002) 253 ITR 378 (Ker.), which High Court’s judgment stood reversed by the
judgment of the Supreme Court in the case of Malayala Manorama Co. Ltd. v. CIT
reported in (2008) 300 ITR 251.
However, the Supreme Court was of the view that its judgment
in Malayala Manorama Co. Ltd. v. CIT reported in (2008) 300 ITR 251 needed
reconsideration for the following reasons : Chapter XII-B of the Act containing
‘Special provisions relating to certain companies’ was introduced in the
Income-tax Act, 1961, by the Finance Act, 1987, with effect from April 1, 1988.
In fact, S. 115J replaced S. 80VVA of the Act. S. 115J (as it stood at the
relevant time), inter alia, provided that where the total income of a company,
as computed under the Act in respect of any accounting year, was less than
thirty per cent of its book profit, as defined in the Explanation, the total
income of the company, chargeable to tax, shall be deemed to be an amount equal
to thirty per cent of such book profit. The whole purpose of S. 115J of the Act,
therefore, was to take care of the phenomenon of prosperous ‘zero tax’ companies
not paying taxes though they continued to earn profits and declare dividends.
Therefore, a minimum alternate tax was sought to be imposed on ‘zero tax’
companies. S. 115J of the Act imposes tax on a deemed income. S. 115J of the Act
is a special provision relating only to certain companies. The said Section does
not make any distinction between public and private limited companies. In our
view, S. 115J of the Act legislatively only incorporates the provisions of Parts
II and III of Schedule VI to the 1956 Act. Such incorporation is by a deeming
fiction. Hence, we need to read S. 115J(1A) of the Act in the strict sense. If
we so read, it is clear that, by legislative incorporation, only Parts II and
III of Schedule VI to the 1956 Act have been incorporated legislatively into S.
115J of the Act. If a company is a MAT company, then be it a private limited
company or a public limited company, for the purposes of S. 115J of the Act, the
assessee-company has to prepare its profit and loss account in accordance with
Parts II and III of Schedule VI to the 1956 Act alone. If the judgment in
Malayala Manorama Co. Ltd. (2008) 300 ITR 251 is to be accepted, then the very
purpose of enacting S. 115J of the Act would stand defeated, particularly, when
the said Section does not make any distinction between public and private
limited companies. It needs to be reiterated that, once a company falls within
the ambit of it being a MAT company, S. 115J of the Act applies and, under that
Section, such as assessee-company was required to prepare its profit and loss
account only in terms of Part II and III of Schedule VI to the 1956 Act. The
reason being that rates of depreciation in Rule 5 of the Income-tax Rules, 1962,
are different from the rates specified in Schedule XIV to the 1956 Act. In fact,
by the Companies (Amendment) Act, 1988, the linkage between the two has been
expressly de-linked. Hence, what is incorporated in S. 115J is only Schedule VI,
and not S. 205 or S. 350 or S. 355. This was the view of the Kerala High Court
in the case of ACIT v. Malayala Manorama Co. Ltd. reported in (2002) 253 ITR
378, which has been wrongly reversed by the Supreme Court in the case of
Malayala Manorama Co. Ltd. v. CIT reported in (2008) 300 ITR 251.
For the aforesaid reasons, the Registry was directed to place
the civil appeal before the learned Chief Justice for appropriate directions as
the Bench was of the view that the matter needed reconsideration by a larger
Bench of the Supreme Court.
